Nigerian States Borrow to Address Revenue Shortfalls as Revenues Shrink

Debt Pressures Mount as 20 Nigerian States Borrow N446bn Amid Shrinking Revenues

Twenty Nigerian states have borrowed a fresh N446.29 billion to navigate growing fiscal challenges as their revenues continue to plummet. Despite an increase in statutory allocations from the Federation Account, the financial strain from existing debt servicing has left state governments struggling to balance their budgets. Nigerian states borrow to address revenue shortfalls, highlighting a larger problem of debt sustainability.

Debt Servicing Consumes Over 80% of Internally Generated Revenue

An analysis of data from various budget reports reveals that, in the first half of 2024, 29 states used 80.7% of their internally generated revenue (IGR) to service existing debts. While federal allocations increased by 40% during the period, the pressure from debt repayments forced these states to turn to more borrowing. Nigerian states borrow to address revenue shortfalls, despite hopes that the increased funds from the central government would ease the financial strain.

Borrowing Continues Despite Increased Allocations

The rise in allocations, driven by reforms such as the removal of the petrol subsidy, has done little to curb the appetite for new borrowing. Instead, much of the income boost from these reforms is absorbed by debt servicing costs. Nigerian states borrow to address revenue shortfalls to meet immediate financial obligations, leaving little room for investments in critical sectors such as healthcare and infrastructure.

Debt Burdens Hamper Development

The borrowing frenzy has left many state governments with little capacity for economic growth. States such as Osun, Ondo, and Cross River are spending substantial portions of their FAAC allocations just to service existing debts. Nigerian states borrow to address revenue shortfalls, but the cost of these loans means development projects are often sidelined.

Experts Warn of Long-term Consequences

Experts are increasingly raising concerns about the long-term effects of this borrowing pattern. High debt servicing costs not only limit the ability of states to invest in vital sectors but also increase their vulnerability to foreign exchange fluctuations. Nigerian states borrow to address revenue shortfalls, but the reliance on external loans exposes them to risks from currency depreciation, which makes debt servicing even more expensive.

Call for Financial Innovations and Better Governance

Financial experts have called for state governments to embrace more sustainable financial practices. They argue that rather than continuously borrowing, states should focus on creating new revenue streams and cutting down on unnecessary expenditures. Nigerian states borrow to address revenue shortfalls because of poor fiscal management, highlighting the need for tighter governance and oversight at the state level.

Conclusion

As Nigerian states continue to grapple with mounting debt, the pressure on their finances shows no sign of easing. Without a shift in fiscal policy and better governance, the cycle of borrowing to cover revenue gaps will likely persist, further straining state economies. Nigerian states borrow to address revenue shortfalls, but the cost of servicing these debts may ultimately undermine the potential for long-term growth and development.